If you’ve heard the phrase “product/market fit”, you probably also know that it is often lauded as the promised land for startups.  Unfortunately, Marc Andreessen himself makes it very plain that his blog post detailing the realities of product/market fit raises more questions than it provides answers.  

Since that post by Marc, we’ve seen hundreds if not thousands of descriptions of product/market fit and even a test to figure out if you’re there (although I think this is the wrong focus insofar as you may have happy customers that would be sad if you died, but maybe they either can’t or won’t pay you to avoid using alternatives).

So I realized something this week, as Stormpulse has been undergoing major transitions: beware of summarizing the goal of your startup as searching for and finding product/market fit.  

Because I think we’ve allowed a very important word to become lost in translation.  The word was implied (though never mentioned) in Marc’s post (and I mentioned it a few paragraphs up and yes, in the title of this post), but it’s rarely, if ever, discussed by founders and VC’s.  

That word is “profitable”.  

(Interlude: I can’t say enough how much one book, recommended by Steve Blank, has changed/molded/inspired my thinking, so I’ll say it again: buy a copy of Delivering Profitable Value by Michael J Lanning and write true, formal value propositions in keeping with his Southwest Airlines example.  If you can’t, your startup is dying.) 

Rather than simply shove the word “profitable” into Marc’s phrase, allow me to share what I currently see as the goal:

The goal of any startup is to help the greatest number of people find the deepest resolution to a high-stakes problem.

This sentence is the whole of my wisdom on surviving as a startup after bootstrapping Stormpulse for the last 5 years.  In it, we find a definition of product/market fit that gives the founder options to break his commitment to a particular value proposition (“I’ll give you, Sally and Bob, this product for this price and it will make you happy!”) and deliberately and carefully choose a new one.  

What do I mean?

Let’s do a little role playing.  You can use your own idea or startup.  I’ll use mine.  Imagine you’ve created a hurricane-tracking website.  Great!  Hurricane-tracking appeals to a lot of people and we are confident we can create a solution that gives people deep satisfaction (resolution) to the problem of not knowing where these great masses of swirling death happen to be located right now. 

Question: will this site have customers?  We have a product, and we have a market, right?  

Answer: yes, it will.  But how do we know if the market is any good?  Marc stated that a “great market” is one with “lots of real, potential customers.”  Oh.  Lots of real potential customers.  Oh okay.  You mean, a situation where lots of real, breathing people will pay you money?

Yes, but it’s more than that.  You don’t just want to build a product whereby great masses of people are going to pay you *some* money.  You want a product whereby great masses of people are going to pay you substantial amounts of money—enough money that your startup can grow, preferably quickly.

Oh.  So maybe a market where lots of people are only willing to pay a tiny amount of money isn’t a great market for a startup?  


Can you think of a market like that?  I can.

So if you want people to pay you more money, you need to …

!Raise Prices
The problem most startups encounter immediately is well known as “the penny gap.”  People are massively less willing to use your product if it costs 1 penny than if it’s free.  And that is going to really kill your market size!  Which means you’re never going to get those vanity metrics that are going to get you funded and allow you to … keep giving away product for free?

But this is an insane dilemma, because how often do real businesses with “lots of real, potential customers” actually have trouble charging even 1 penny for their products?  Would you walk away from a restaurant that wanted you to pay a penny for a hamburger?  Would you cancel an order for pizza if the cashier on the other end said the total is going to be a penny?  Of course not!  That’s insane!  And yet most startups seem unable to bring themselves to charge more than the price of a pizza for their product that is *going* to make your life so much better.  

What is going on here?

What’s going on here is that startups are not attacking high-stakes problems.  Even a hamburger joint is higher-stakes for the hungry customer than your new web app.  Why?  Because he knows the hamburger place down the road is also going to charge him >$0.00 for their quarter-pounder, so he doesn’t really have the option of walking away, does he?

So there should be more encouragement for founders to MOVE INTO problem spaces that are high-stakes.  

This will result in two things:

1) Whether you decide to charge money or not, it will get people talking about your product.  People want to share solutions to high-stakes problems with their friends.  

2) You will have the option of charging money if you make people measurably more successful at solving that problem than any existing alternative.  This is the way over the penny gap and into profitability.  

!How can a founder do this?
Consider the alternatives.  If a person doesn’t use my product, what will happen to them?  Will they go hungry?  Will planes crash?  Will supplies fail to arrive?  Will their car fly off a cliff?  Or will they simply live without it (hint: much more likely).

Consider the switching costs.  If a person adopts my product, how much suffering will they have to endure to unlearn their existing solution and come into my world?

Since I want you to understand that high-stakes doesn’t mean “don’t do something social” (at least, it didn’t mean that in 2004), take Facebook as an example.  TheFacebook.com solved a high-stakes problem for college kids because an amazing alternative just wasn’t there.  Could Facebook now charge for their service?  Possibly, but probably not much more than they already charge (you know, taxing you with advertisements and privacy concerns?).  The only way they could charge a true subscription price is if the alternatives were non-existent.  And I think we know the minute that Facebook started charging the free alternatives would sprout up like crazy.

Shift your startup from consumer-focused to business-focused.  Because businesses aggregate problem-seekers (customers) and exist for the purpose of scale, all numbers, from the amount spent on chairs to the amount spent on pencils to the amount spent managing finances, get bigger.  Which means if you serve them, you can raise prices away from that $0.00 price you’re offering now.  Nothing is free in business.  Even free web apps cost the money of training and learning and setup.

Work with macro-trends.  Another way to move into a higher-stakes problem space is to find a trend in the world that is making some problem continually higher-stakes.  Google did this by organizing the world’s information.  Since the amount of information is always growing, the stakes of not being able to search it is always increasing.  I see a similar pattern with Stormpulse, not just in terms of the information challenge, but in terms of civilization taking more and more risks with regards to the speed of their movements and the degree to which environmental hazards like weather can harm their productivity/survival/success.

Caveat needed here: I see a lot of startups presenting solutions to problems that are not at all high-stakes now, but “will be super important by 2023.”  That’s this suggestion taken to a fault.  You are too early and very few people will pay you yet (though some government agency may fund you).  If you can survive with just the super-early-adopting-very-concerned market paying you handsomely, great.  If not, you’ve been warned.

“It’s not you, it’s us.”

If you summarize ‘achieving product/market fit’ as the goal, you may end up achieving a state wherein you have lots of customers but very little profit.  As a result, you have lots of demand, and even lots of potential, linear growth, but you’ve settled for linear and you’ve settled for thin margins and you are stuck.

If that’s the case, start looking at your customers problems from the standpoint of risk, and see if you can find segments of your customers that use your product in a much higher-stakes context than others.  At that point, you can segment those customers into a higher-priced arrangement.  Notice that this does NOT have anything to do with giving them different features or giving them more horsepower.  It simply has to do with recognizing that your product is solving a higher-stakes problem for them than it is for everyone else.  As such, you should be able to charge more.

Once you start charging one segment of your customer base significantly more than the rest, you may also start to see that the amount of support and effort to please those people is also lower.  Maybe you’ll even discover (through focus) that there are lots and lots of these people.  At that point, you may wonder if you should even be serving these two diverse sets of customers.  I can’t answer it for you, but if the answer is ‘no’, you’ve got a lot of fancy footwork (judo) to do to transition between serving both and serving the one.  It may require a breakup speech, refunds, apologies, and hurt feelings.  But the warning of Isaac Hall, co-founder of Syncplicity (and now founder of Recurly), rings very true:

    Our company had too many features and this created confusion amongst our customer base. This in turn led to enough customer support issues that we couldn’t innovate on the product, we were too busy fixing things.

Too many features comes from too many masters.  Don’t let this happen to you.  Find or create users that are willing to pay more, and focus.
Fri, 28 Jan 2011 21:05:30 GMT
Fri, 28 Jan 2011 21:05:30 GMT